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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Investors Turning Away From Green Energy

Investors Turning Away From Green Energy

Investors looking for the next “big thing” could be forgiven for being a little unsure about the state of the green energy revolution.

While some commentators are optimistic about the technological progress in the field, new data is starting to raise some doubts. Recently, The Guardian noted that the number of renewable energy patents has fallen drastically over the last few years. The number of clean energy patents filed fell from 35,590 to 20,655 between 2012 and 2014. Related: Oil Still At Risk Of Geopolitical Turmoil

Patent filings are often used as a proxy for innovation. With filings down, entrepreneurs may be finding it harder and harder to uncover new ways of producing clean energy.

The recent fall off in innovation looks to be traceable to solar energy which makes up roughly two-thirds of patents filed in the clean energy space. As the margins on solar panels have plummeted due to oversupply coming out of China, research and development has also fallen drastically. Of course, austerity in Europe is not helping much either as countries there limit or cut-off subsidies for renewable power.

At the same time as innovation is faltering in clean energy, big investors seem to be shifting more money into a more conventional energy revolution. In recent months as the oil markets have collapsed, numerous private equity funds have expressed interest in investing in the area. These investors appear confident that fossil fuels and oil in particular are still going to be important sources of energy for many decades to come. Even notable angel investors like Mark Cuban are not as focused on clean energy as they are on other emerging technological waves. Related: Texas Floods Affect Some Oil Wells, Refineries Mostly Unaffected

The lack of innovation and shifting investment priorities of major investors threatens to undermine the clean energy future that the US government so fervently believes is coming. Unless there are bigger tech breakthroughs, it will likely take decades for clean energy to make any real headway against the existing energy infrastructure. It simply does not make sense from a profitability standpoint to tear down an existing energy production system unless the replacement is dramatically more profitable. Cost reductions for current iterations of clean tech may only offer marginal cost savings over fossil fuels, even in the future.

Perhaps the best indication of the slow progress of the clean energy revolution is that many cite the biggest clean energy innovation of the last few years as being financial rather than technological. While it is certainly true that solar panel lease options have made adoption dramatically easier, easy financing alone can’t make the world a greener place.

The International Energy Agency estimates that the world needs to invest $1 trillion annually in green energy in order to avoid a climate crisis. So far that is not happening. While investment in 2014 did rise to $270B, this is still roughly a quarter of what the United Nations and IEA say is needed, and that increase comes after several years of falling investment. Related: Top 4 Oil Companies For Dividend Investors

In the US, interest is much greater in fracking and other unconventional fossil fuel sources, while Europe seems more worried about its financial problems than investing in green tech. Even in China, investment has been volatile, up some years and down others.

It is impossible to say if the volatility in investment is driving a fall in patents and innovation, or if the lack of innovation is driving sporadic investor interest; either way though, it does not look like the green energy revolution is growing as fast as once expected.

By Michael McDonald of Oilprice.com

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